In early 2021, stocks of the companies AMC, BlackBerry, and GameStop made headlines—but not just for performing well. In a matter of days, some of these stock values increased by up to 30 times their previous price before a smartphone app called Robinhood restricted trading, angering some investors and propelling the situation into greater media attention. What happened, and what could that mean for people interested or invested in the stock market?
Augsburg University’s Associate Professor of Business Marc McIntosh brings his financial expertise to help us understand some of these rapid changes and see the big picture of today’s stock market.
Q: What are “meme stocks,” and why have they become notable lately?
A: A meme stock is any stock that’s seen its price skyrocket due to excessive trading volume from retail investors, mostly fueled by people on social media (primarily Reddit, TikTok, and Twitter). There are a lot of reasons why meme stocks have been so popular. It’s partly pandemic-related, since some people had more time to gamble and speculate and may have extra money on hand due to government stimulus payments. Also, social media forums have made it a lot easier to follow trends. In the case of GameStop, the price had a tremendous run almost solely due to Reddit posts.
Q: What can we learn from what happened with AMC, BlackBerry, and GameStop stocks? What does that tell us about the stock market and how people are interacting with it?
A: It’s important to distinguish between gambling and investing. The vast majority of people buying these stocks are gambling that their price will go up based on rumors and social media posts, which can be very dangerous. It’s really the equivalent of going to the racetrack and betting on horses or going to Las Vegas to play the slot machines. Investors, however, do much more research based on the fundamental financials of the company and assess the potential of the company based on either their analysis or input from a trusted, professional financial advisor. In other words, it’s OK to invest in a meme stock, but make sure you’ve done your due diligence on the company’s growth prospects. For example, does GameStop really have cutting edge technology, or is its business model antiquated?
Q: Are tools like the investing app Robinhood (which offers no-fee stock trading) just a trend or an indication of a new direction for the world of investing?
A: Robinhood is here to stay. The good news is that the app is extremely user-friendly, and the average investor can now make money in the stock market in ways that, until recently, were only available to institutions like pension funds and mutual funds. There has been a democratization in stock market investing. The bad news is that there are now lots of ways to lose money in the stock market if you or your financial advisor don’t have finance. Finally, the ugly part is that not only are gains magnified in a short period of time but losses are as well. If used wisely, Robinhood can be a tremendous way to build wealth through stock market investing.
Q: What are reliable principles or tactics for people just beginning to get involved in the stock market?
A: Many famous investors such as Warren Buffett and John Bogle have argued convincingly that it’s very difficult to pick stocks that will outperform the overall market. In fact, there are several academic studies that prove that it’s almost impossible for the average mutual fund manager to “beat” the overall market. So, the sensible strategy is to put long-term savings into a broad-based market index fund. Many retirement plans have fund options indexed to the S&P 500 or the total stock market.
Q: What should Augsburg Now readers keep in mind about the stock market today and in the near future?
A: First: On average, investing in the S&P has delivered returns higher than 10% since 1929. This dwarfs the returns you get by putting money in a savings account or investing in high-quality bonds. For the long haul, it’s important to have this return to retire comfortably. Second: The time people spend in retirement is getting longer as life spans have expanded due to health care improvements, so people need a huge nest egg to live comfortably—possibly into their 90s. Third: Due to the magic of compounding and starting earlier in one’s life, achieving this nest egg can be relatively simple. If average 25-year-olds invest $2,000 in the stock market a year (such as in an index fund that achieves 10% average returns), they could have more than $1 million when they retire at age 65. Wow!